Ok, here is another "fun" and really looooooong options lesson for you since you liked that last one so much. <vbg>
The Problem:
There is always a lot of discussion (whining ;) whenever the stock heads down a bit and it's very understandable to be concerned when the market is so bullish and other portals/nets are moving in the opposite direction. <gg> Many on the primary thread have expounded on the "long and strong" approach and given excellent reasons to stick with GNET during the dips and to avoid panic selling. I agree with those posts, and as long as the long range strategy of the company is still in place (check!), there is no reason to worry longer term.
That said, in the shorter term, it can be gut wrenching to watch GNET zoom to the 110+ level then pull back 20-30% over the next couple of weeks. For traders it's great, but for longer term investors, it can make your EYES BUG OUT and turn you into zombies. You may stop thinking straight, and begin to post like levy.
<ggggg> ;) <Bahahahahahahaha!> <Tee hee hee!> :) <A HAHAHAHA HAHA!!!!!1> :-), <yuk yuk yuk> 8*] <AaaahOoooGaaaaa!> ...
THE SOLUTION
Eliminate all carbs from your diet!
Oh sorry. That's the Adkins' Diet, wrong thread...
Subject 30926
*Is* there a solution you ask? (Ask me.)
YES! I think there is!
Ok... a good strategy for these situations - when the stock runs up and peaks - is to buy protective put options. For those unfamiliar with options, a put is an option that increases in value when the stock price falls. (For real? YOU BETCHA!!!) So buying puts when a stock peaks is one way to hedge oneself against the possibility that the stock will retrace following the upward move (which would lead to oneselvvvfff's eyes BUGGING OUT resulting in oneself looking like a zombie).
IMPLEMENTING THE SOLUTION:
So, for discussion's sake, let's just say that if one had bought put options when GNET peaked at ~110, though the value of the long shares has decreased to the mid 80s, the value of the puts would quite possibly have increased substantially during the same period of retracement. The put holder could sell the options for a profit when he determines that the stock is ready to move back and/or he is comfortable with the profit. "Don't get greedy!
THIS SOUNDS TOO EASY! WHY DOESN'T EVERYONE DO THIS?
Buying any option is very risky as the value of options is determined by the intrinsic as well as the time value on the contracts. So, the value of the options will decrease as the expiration date is approached. Options should not be played by those who cannot tolerate the risk, but for those who can literally afford to lose the entire premium (everyone raise your hands now!), buying puts is a great 'insurance' when one wants to remain long. (If the option expires worthless, it's because the stock moved against your position and/or time just ran out. And/or you are just a total dufus and shouldn't be playing options, and YA... SO WHAT, IT'S HAPPENED TO ME, WHICH IS WHY I'M TELLING YOU HOW TO DO THIS INSTEAD OF DOING IT MYSELF.)
[Idea! I should be a broker! WoooooooooooHooooooooooooooooo!]
SO I CAN REALLY LOSE MONEY ON THIS DEAL, HUH?
Good question, sandintoes! And the answer is...Well, yes, but the loss on buying puts is limited to the cost of the puts (the premium) plus the commission, so it's a finite loss. The gain is theoretically infinite, but is usually far less than infinite in actual practice. ;)
Note that I used the word 'insurance', because in this scenario, though the purpose of the puts is to protect the investor during times when the stock pulls back from its highs, it's just like house insurance or car insurance... one hopes not to have to actually *use* the policy. So if the stock runs up and you buy puts and it keeps on going up, then unless you sell the puts quickly (at a loss over what you paid for them), you may just eat the entire premium (and of course, your eyes WILL BUG OUT and you will look like a zombie...) Remember, it was insurance! However, if the stock does peak and then retrace, the protective puts are making you money as the stock comes back down and you look like a genius. (And you can start your own guru thread here on SI!!) Oh, totally awesome, man! Coooool!
ARE THERE ANY DISCLAIMERS TO THIS "ORATION"?
Indeed! Note that puts (as with most options) do not move point for point with the stock depending on the strike price and time value involved, but as I mentioned above, puts typically go up in value when the underlying stock value decreases, and vice versa. (That means that they go DOWN in value when the underlying stock value increases! DUH!)
Buying puts is a bearish strategy and therefore might be psychologically difficult for the emotionally exuberant investor (this surely would not apply to any GNET shareholders, so any emotional and exuberant people should please overlook that last comment). <gg> However, most people invest to make money, (unlike myself but let's not go there :), so one's position can be hedged with puts while still hanging long and strong, rah rah rah, etc.. .
DO YOU HAVE ANY OTHER WONDERFUL IDEAS, V.?
Sure! Another interesting play is to sell naked puts when the stock dips when one wishes to accumulate more long shares. You must be very comfortable with owning the stock at a particular price in order to be happy and successful with this strategy in case you are 'put to' (have to buy the shares at the strike for which you received the premium in order to enter into the contract). But, if one likes the stock at a certain price and would've bought it there anyway, the basis can be lowered further by the premiums received when naked puts are sold.
BTW, I would never be comfortable suggesting that anyone sell naked calls on a volatile internet stock such as this unless one has a death wish and wants to hand his entire life savings over to some filthy, repugnant, drooling MarketMakerMan who is waiting to laugh in your face and point at you reallycloselike and say, "Gimme all your lovin', all your hugs and kisses too! Gimme all your money, cash & margin - I KISS YOU!"
Ok, so maybe that's a slight exaggeration.
I'm sure they don't drool. Too much. But I'll bet they all want to play the accordian.
;)
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